Why global real estate is taking up the sustainability challenge

The level of governmental action needed to meet the Paris emissions targets remains far short, but private actors, including many in the global real estate sector, are taking up the challenge.

January 24, 2019

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The built sector is responsible for upwards of 40 percent of the world’s Green House Gas emissions, making it crucial to achieving the Paris Agreement targets.

At the December COP24 gathering in Katowice, Poland, negotiators agreed a common rulebook that will govern how the 196 signatory countries keep their promises on cutting carbon emissions. The regulations will provide a crucial practical framework to help nation states deliver on the 2015 Paris Agreement goal of limiting average global temperature rises to well below 2°C above pre-industrial levels.

However, achieving that goal requires rapid, far-reaching changes in all aspects of society.

Real estate progress on Paris goals

A recent report from the Urban Land Institute’s Greenprint Center for Building Performance noted members’ buildings continue to reduce energy and water use, waste generation and carbon emissions. It found participating properties are well ahead of schedule to reduce greenhouse gas emissions by 50 percent by 2030, in line with the Paris goals.

Property companies’ number one approach to meeting the targets has been to focus on energy efficiency initiatives, notes Tom Roundell Greene, Director, Global Sustainability at JLL. “We are seeing significant improvements in heating, ventilation and air conditioning equipment, along with greater use of efficient lighting, and a focus on improved plant and infrastructure.”

Efficient lighting equipment is proving one of the most cost effective and impactful ways to reduce building emissions, as it directly and immediately reduces energy consumption, adds Roundell Greene. “And the improvements in technologies, coupled with reduction in acquisition costs have accelerated adoption.”

Firms are also adopting a range of more high-tech approaches to drive property efficiencies, such as real-time data to identify and monitor opportunities for ongoing improvement, IoT platforms, and leveraging the evolving breed of proptech and building management systems.

Alongside these efficiency programmes, other notable action streams include expanding the use of renewable energy sources, and introducing green building principles across companies’ portfolios, says Roundell Greene. At the same time, companies are taking steps to enhance their resilience and increase contingency planning to guard against the impacts of climate change.

Sustainable self-interest

The need for concerted, collective action to limit global warming is widely accepted. But there are compelling, self-interested commercial reasons for why real estate companies should lead the way, says Cynthia Curtis, SVP, Sustainability at JLL. “The business case isn’t around reducing emissions per se, rather the benefits that flow from the actions undertaken.”

Lower operating costs stemming from efficiency gains is an obvious one. Then there is risk mitigation, brand enhancement and heightened innovation since emissions reduction goals often foster more innovative processes. Employee recruitment, retention and productivity are another.

“Employees, particularly millennials, increasingly want to work for a company that articulates and practices social and environmental responsibility,” says Curtis. “Health and well-being are also growing in importance. Indoor air quality, thermal comfort, lighting design and daylighting, and freedom from noise and distraction all factor in to improving productivity and reducing absenteeism.”

Increased asset values are a further consideration.

“According to the World Green Building Council, the percentage of owners reporting that new green buildings have an asset value more than 10 percent greater than those of traditional buildings has nearly doubled, to 30 percent,” notes Curtis.

Meanwhile, research by Deutsche Bank found companies with high environmental, social, and governance (ESG) ratings have a lower cost of debt and equity and outperform the market in the medium and long term.

Mixed success

While the ULI report offers some encouraging signs of how the real estate industry as a whole is embracing the Paris emissions goals, some sectors are making more headway than others.

“To date, Class A commercial is demonstrating the best sustainability performance, with Class B a close second,” says Curtis. This higher performance is in part a function of client demand. “Clients are paying a premium for the space, so they expect it to be optimised. In addition, a front office or public-facing space expects to have the elements that come with sustainable design, such as good ventilation, lighting and automation.”

By contrast, Class C and multi-family have made the least progress on sustainability. Tenants are paying a lower price-point, hence the owners don’t have the same incentive to make the relevant upgrades and investments,” notes Curtis.

Similarly, while industry players have tended to focus on Scope 1 and 2 emissions that are more under their control, they will need to shift attention to their wider Scope 3 supply chain emissions if meaningful headway is to be made.

Further efforts should include partnering with suppliers on issues such as circularity, waste reduction and process improvements, and investing in ‘green’ technologies and transportation infrastructure. Enhancing engagement with owner, occupier and investor stakeholders – for example, to help highlight sustainability as a value driver for organisations – is another priority.

While there is still some way to go, Roundell Greene is positive on real estate’s part in fighting climate change.

“Evidence now shows that a real estate strategy incorporating sustainability not only improves property and asset value and enhances the occupier experience, it’s the hallmark of true leadership.”